How Does ‘Liquidity’ in a Derivatives Market Affect the Bid-Ask Spread for an Option?

High liquidity in a derivatives market means there are many buyers and sellers, leading to a high volume of trading. This competition generally results in a narrower bid-ask spread, which is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.

A narrower spread means lower transaction costs for the trader.